Bloomberg reports that the ECB has said it will provide liquidity to Cyprus within the existing rules governing the central bank

Media reporters state that S&P500 and Euro rose sharply on the news.

Fc comment: what do they mean by existing rules? It's all a bit of a yawn anyway. Merkel will be tucked up in bed and nothing of substance will happen for a few hours now anyway.

As for the Euro rising, I don't know which market they are looking at but I see sell orders coming in with no let up, present spread is between 1.2859 and 1.2864, this is down from 1.2879 to 1.2883 a couple of hours ago.

Due to current economic conditions the light at the end of the tunnel has been turned off

According to Mega TV, Anastasiades [Cyprus' president] is reported to have said to Rehn and Brok: “When I warned you that there would not be a parliamentary majority to pass the agreement, you didn’t want to listen. Give my regards to Mrs Merkel.”

Chariot of Fire wrote:As for GreecePwns.....yeah, what? A massive debt. Get a job you slacker.

Viceroy wrote:[The Biblical creation story] was written in a time when there was no way to confirm this fact and is in fact a statement of the facts.

In times past we had Jean-Claude Juncker. The prime minister of Luxembourg. He was the head of the Eurogroup of finance ministers when the bail-outs of Greece, Ireland, Portugal and Spain’s banks were agreed on. The very mention of his name, at the time, could evoke an almost spitting rage, except that to actually spit on his name seemed to create a sizzling noise as if the very fires of hell were making it so.

Those deals, we all so despised, now we can almost hear him sing “I am the very model of a finance General” (with due apology to Gilbert and Sullivan). How times have changed. What then seemed the actions of a mad man, now seem the actions of a sage.

The intended design of last week’s bail out to rescue Cyprus has backfired so badly this week, that there is now every chance the island may pop from the single currency like a squeezed orange pip from between the fingers. Whilst Bank shares have tumbled across Southern Europe, the Bond markets have been an ocean of calm. Even if this ignominious exit can now be avoided, this complete balls up has done a serious wrecking job on the Island, its banking system, its economy and fractured interests beyond its shores.

In case we need reminding. The deal criteria given on the 16th was for those under €100,000 balance to pay as well as those uninsured deposits over €100,000 at a rate of 9.9%.

This threshold of €100,000 alienated one of the most influential bodies in Cyprus today, that of Russia. By also attempting a raid on the sub €100,000 band the EU managed to also alienate the very people of Cyprus. Even when these terms were watered down to exempt those with balances under €20,000 not one single MP voted in favour. Are you surprised? Apparently those powers that be in the EU actually were. This is how far they have become removed from reality.

The Finance Minister then jumped on the next available flight to Moscow to see if Russia could stump up some cash, but to date this has yielded no result.

Cypriot cash machines are working overtime and were being refilled as the banks are not going to reopen until after March 26th. I say after, rather than on March 26th as there is every likelihood that some may never reopen.

However this pans out, it is now odds on that a bank run will occur. The local community is most probably going to withdraw every cent they can, stuff it in anywhere the banks, or any other institution cannot get their sticky fingers on it.

So how did this all happen? The core of the problem lays in the size compared to GDP. The amount is actually quite small, some €17 billion. However, this is pretty much the size of the Cypriot economy. A bail out of this size would take the public debt to around 150% of GDP. Quite unsustainable. Furthermore, over €10 billion of this is needed to recapitalise the banks, especially the two top banks who together have assets some 4 times the size of the Cyprus GDP.

I mentioned some time back about the island’s banks being pretty much awash with Russian moolah and also mentioned that the Germans were spitting venom over any bail out required because of this. The prime Minister of Cyprus has been in the job less than a month. His acceptance speech, full of bravado, stated clearly that under no circumstances would bank depositors suffer any kind of haircut in their accounts. Notwithstanding his empty words that this ‘tax’ was different, in fact it is exactly what he promised would not happen.

Who was behind this levy? The finger has to point to Germany, The Central European bank (lapdog of Germany) and the IMF. They refused point blank to cough up more than €10 billion. The difference was a simple €7 billion. Privatisation will provide around€1.5 billion and the rest had to come from somewhere. Deposits in Cypriot banks as at the end of January were reported at €68 billion. You do the maths. Add to this mix the small fact that of the reported €68 billion, Russian deposits are estimated at €21 billion. As I mentioned some weeks ago, the largest investor in Russia has been Cyprus (with Russian money). Nearly one third of all Cypriot bank deposits last year and around one quarter of total lending to Russia shows the size of the situation. No wonder Russia was the first place Cyprus went in 2011 when the markets pulled stumps on them.

However, the alacrity with which the creditor countries seemed to agree to all this doesn’t bear close scrutiny. So far there has been no bank run in an EU country, including those taking very large bail outs. So one wonders why the smaller balance holders were to be hit, which of course has had something of a huge domino effect on the banking insurance scheme. The prime Minister, in a fit of I do not know what, imagined that the intellectual impact of 9.9% would be far better than 10%. He forgot this message would be delivered to people who live and die by money, and figures. They know, as well as anyone, that the actual difference is 1/100th. The total estimated deposits over €100,000 are €38 billion, so this would raise €3.8 odd billion. Deposits sub €100,000 would have to bear the balance of the burden, some €2 billion.

It all started to go pear shaped when it became apparent that this was never going to happen. Germany has dug in and is refusing to budge. So the Cypriots have turned, once more, to Russia.

There is serious poker being played here. The recent discovery of a gas field has given Cyprus a lifeline. Putin, having bared his teeth over the situation now has to show he can protect Russian interests abroad. It is likely he would bargain very hard for (1) an extension on the present €2.5 billion loan and (2) any further moolah.

On the other hand, Germany really does not want to see an increased Russian influence in the Mediterranean. So in turn, Germany will be trying to find a way to stop Russia from making this play, as it would also kick the can down the road and increase the dependency on Russia.

So what may happen? Well the two most obvious results will be (a) Germany remains firm and there is no breaking the impasse. Cyprus is ejected from the Euro and the ramifications of that momentous decision are played out. The peril in which this places the euro Zone cannot be underestimated. Yes, some might say Cyprus is tiny and the shock waves wont amount to much, but they may well. The fears of last year when the Euro slid so badly would rear once more and this would bring all the related problems of imported inflation etc with it.

(b) The more likely is that some kind of fudge will be resolved. The Russians getting a piece and the ECB picking up more. The balance still being thrust upon the Cypriot people.

However, the damage is already done, and what damage it is. The forecasts for Cyprus were a 3.5% contraction this year. I imagine this looks very rosy right now. I would suggest nearer 5% or even 6% contraction. This will then be followed by a further slide a la Greece (the economy of which has contracted by some 20%+ over the past 5 years). Furthermore, it is highly unlikely that the original projection of a 100% debt to GDP ration by 2020 would be achieved. This then casts the people of the island into pretty much a generation of depression with all the social problems inherent in this.

Beyond the island, weak banks in other economies around the med and elsewhere will have seen all this unravelling before their eyes, so will their deposit holders. Whilst a bank run is unlikely, it may restart the slide in deposits that occurred 2009 and 2012 when those deposits slumped by some 30% with Greece at nearly 40%. This, in turn will slow any recovery.

Lastly, and maybe most importantly, it is now obvious to any watchers that the politics of the euro zone outweigh any other needs. And, dear reader, in this last sentence is the core of the weakness of this whole crazy unified currency.

Due to current economic conditions the light at the end of the tunnel has been turned off

Fc, how much of the pro-European Project mindset gears this dilemma? For decades, further unification of Europe was sought, and with the prospect of it all crumbling (or partially crumbling), it seems that many in power are extremely reluctant in any regression of unification.

For example, with Greece, the EU/European Commission simply should've let Greece go out of the Euro zone. Instead, they imagined terrifying slippery slopes, so they--along with the ECB and IMF--gobbled up the Greek securities from the non-Greek banks who previously owned the Greek securities. Now, this merely prolonged the problems, and given that Greek government is essentially being rewarded for neglecting its implicit side of agreement (i.e. austerity), then the Greek government will holds hands with the ECB, IMF, and European Commission as they merrily continue kicking the can down the road and causing all these other problems.

crispybits wrote:Nice post fruitcake. Are you seriously interested and eductated about this stuff or was that a copy/paste job from somewhere else? (No insult intended, either way it's very informative)

I do actually trade in the forex markets and am deeply interested in all things financial on a Global scale. I spend around 3 hours a day researching, reading and following what is happening. You can find my obvious interest if you search back in this forum some years. I think if you search for the word 'mammon' you will find my early posts

Fc

Last edited by Fruitcake on Thu Mar 21, 2013 6:08 pm, edited 1 time in total.

Due to current economic conditions the light at the end of the tunnel has been turned off

BigBallinStalin wrote:Fc, how much of the pro-European Project mindset gears this dilemma? For decades, further unification of Europe was sought, and with the prospect of it all crumbling (or partially crumbling), it seems that many in power are extremely reluctant in any regression of unification.

For example, with Greece, the EU/European Commission simply should've let Greece go out of the Euro zone. Instead, they imagined terrifying slippery slopes, so they--along with the ECB and IMF--gobbled up the Greek securities from the non-Greek banks who previously owned the Greek securities. Now, this merely prolonged the problems, and given that Greek government is essentially being rewarded for neglecting its implicit side of agreement (i.e. austerity), then the Greek government will holds hands with the ECB, IMF, and European Commission as they merrily continue kicking the can down the road and causing all these other problems.

How much of this is due to that "European unification" sentiment?

I have been accused of being something of a crazy gang member for some of my hypotheses. But truly, I believe the objective of a centralised Europe whereby a select Political class rules has been the core objective for many years, but to be honest, this is a subject for a dinner and for a few hours articulation (along with some fine wine of course!)

In short, I believe that once the common currency was born a huge step had been taken. To undo this would unravel so much of the progress made in the onward march for a unified Europe rules by one body. The problem was always that unification of currency took place via a series of fudges. These included literally cooking the books of the Med countries to show they fitted the one size fits all strategy. This was madness to any one watching.

The grand plan is now so woven into the fabric of European society generally that a failure is unthinkable. However, I still believe that at some point the Euro will unravel. whether this happens in my lifetime is debatable. The question is always, what are the Germans going to do. After all, they have been the effective paymasters for some time now.

I can only applaud the cursed son of manse (Gordon brown) for the one decision he took which was correct, that of not joining the Euro when the opportunity presented itself.

Due to current economic conditions the light at the end of the tunnel has been turned off

Further to my post above. Just crunched the numbers. I estimate that should the Med countries et al fail, the losses could amount to $1 trillion. That's a pretty good reason to keep putting off the fateful day.

Due to current economic conditions the light at the end of the tunnel has been turned off

So what's the deal with the Russians now? Their government is going to remove all of it's money invested into Western banks and is encouraging all Russian citizens to do the same?How accurate is this? I'm reading some weird stuff, you guys. But then, this whole situation is weird...

Juan_Bottom wrote:So what's the deal with the Russians now? Their government is going to remove all of it's money invested into Western banks and is encouraging all Russian citizens to do the same?How accurate is this? I'm reading some weird stuff, you guys. But then, this whole situation is weird...

First up, the Russians wont deal with the Cypriots, so no progress there. Looks like the Cypriot Govt is going to have to plunder state assets, including pensions, and split the Cyprus Popular Bank by shifting the 'good' stuff into one vehicle and shifting the 'bad' stuff into another. It all sounds pretty desperate, but then it is desperate times in which they find themselves.

Regarding the Russians. The Govt isn't going to remove all of it's money invested, that would be certifiable. What has happened is a shift in policy from outward investment to inward.

Due to current economic conditions the light at the end of the tunnel has been turned off

It transpires that Cyprus removed a gas license from Novatek, one of Russia's largest Natgas producers based in Moscow, last year. Having entered into advanced negotiations them late October to begin exploratory drilling, the Cypriot Govt. then broke off licensing negotiations at the beginning of December. Word is, there were some pretty pissed off Russians at this decision. Some pundits have got it all wrong, saying the license was transferred to Total Oil (France) however, this is incorrect. In fact Total own 15% of Novatek. the license negotiations were, in fact, transferred to a company composed of Italy's ENI S.p.a and South Korea's Kogas for the same area that the Russian-French consortium had sought to drill in. Total then entered into negotiations on its own for exploration on another block.

To add insult to injury, Cyprus then showed a marked increase in its desire for closer ties with NATO.

It would not surprise me to see this as a game of brinkmanship. Germany (and Europe) want to lessen dependence on Russian gas so the fields around Cyprus (if the numbers are to be believed) would assist this policy greatly. I need say no more.

Due to current economic conditions the light at the end of the tunnel has been turned off

So the news is the ECB will get what it wants from Cyprus. After what seems to have been a week of brinkmanship the Cypriots are having to throw their hand in. A summary of their proposal is:

The two banks with the biggest problems will be restructured with uninsured creditors taking a 40% haircut. This covers a lot of the €5.8 billion required (it should be noted that there are rumours the troika has upped the ante to €6.7 billion, but this is not confirmed). Whatever, the balance looks like coming from the uninsured deposits (ie. over €100,000).

There is a significant part of this not yet really thought about. Capital controls. These will be required to stop a run which is bound to happen otherwise. the Russians are threatening to remove their deposits should the haircut be applied...(there is also a strong word that many of the wealthiest had already shifted their cash into other countries). However, if the Russians did follow through on their threat, it would quickly render the banks insolvent regardless of how much money was pumped in (€10 billion from the ECB would only scratch the surface).

The real nub of the matter is this. if these Capital controls are introduced, you effectively have a currency removed from the Euro system. Cypriot Euros would be severely limited in their movement, so getting them out of Cyprus near to impossible. This would, in effect, make them pretty worthless in the Euro zone (imagine, if you will, Scotland being told their Scottish pounds were no longer acceptable in England). Monetary union is about free capital flows. take this basic tenet away and you do not have monetary union. The part of that union, no longer able to trade freely and transfer capital freely is no longer a part of that union. QED, the Cypriot Euro cannot and should not then be considered a part of the Euro zone as it really becomes, once again, a national currency. This could well be the first move in ejecting it from the Euro all together.

Due to current economic conditions the light at the end of the tunnel has been turned off

"To all those who say that we are strangling an entire people ... Cyprus is a casino economy that was on the brink of bankruptcy," [French Finance Minister Pierre Moscovici] told Canal Plus television.

So this happened in Iceland, now it's happening in Cyprus ... Fruitcake, will the Canary Islands and Switzerland be next?

It's nice to see a tax haven getting fucked. Word is that all investors are now getting nervous about their tax evasion cash being taxed by a country with a banking industry with liabilities that are greater than their countries GDP. ....Switzerland

I am fascinated to see what the effect of this deal will be. As I mentioned previously, to have Capital controls effectively creates a second currency within the Euro.

I'm sure we will hear the usual drivel pushed out by Draghi and his compadres that the Euro is still irreversible, Eurostat will keep pumping out the meaningless numbers including Cyprus and the EU politburo will tell us all the Euro is as stable and glued as it ever was. In the real world we now know different. there are 2 Euro currencies, one for the continental Euro and another for Cyprus.

A most interesting side effect of this will be the likely depreciation of the Cyprus euro versus the continental Euro, which is a floating exchange rate in all but name. I imagine this will alleviate some of the pain induced by the imminent economic collapse in Cyprus which is a good thing. Obviously the Cypriot Euro will be exchanged at par where accepted in the continent, but that traffic will be tiny. More importantly will be the purchasing power of the Cypriot Euro on Cyprus itself. In effect, Cyprus will have gained control of its own currency without all the inherent costs and risks of reverting to the old Cyprus Pound.

Whilst this may seem good news on the surface, there are issues. Firstly, there are going to be shortages of Euros in Cyprus itself due to the capital controls. The Cypriots cannot print their own Euros, this is done in France and the Netherlands for them and shipped over. This means the strict rules regarding numbers of notes printed vis a vis the population will be adhered to. However, there is likely going to be a real need for more hard currency in the system as Cyprus slides back some way to a cash only economy. History shows that when this happens, other currencies fill the gap. There is already a large British presence on the island and it would not surprise me to see shops and businesses quoting in both Euros and Pounds sterling very soon. I can also see the Turkish Lira being used extensively in the northern part of the island.

Add to this the ban on electronic transactions in euros and it does not take a great leap of logic to see e-currencies and mobile money surging. They loop around any capital controls anyway. One can not forecast how the Cyprus Govt or central bank may respond to this. they may welcome the loosening of restrictions due to this or, under increased pressure from the troika may try to clamp down (which would be an error). The reasons for welcoming this stem from increased economic activity. However, one can be pretty certain, the reaction will be as of a result to the pressure on public finances caused by the imminent collapse. If tax revenues decline rapidly, the Govt may force the use of euros to ensure collection (using alternative currencies is pretty much a standard method in avoiding tax in any developed nation).

Returning to the ECB makes for interesting speculation. The troika et al will still control much of what happens. Their desire to clamp down may make the lack of currency unbearable. Should this happen, then Cyprus would be able to break free more easily having had, in effect, its own currency anyway! I imagine a lot of horse trading is still to be done, but firmly believe we have seen the cracks in the Euro widen.

Due to current economic conditions the light at the end of the tunnel has been turned off

After talks at the highest level with the President of Cyprus, the Eurogroup yesterday reached an agreement on a programme for the Republic of Cyprus that, if properly implemented, we believe will restore the viability of the Cypriot economy.

The European Commission has worked intensively to make this deal possible.

We have had the interests of the people of Cyprus in mind throughout this process, since we started talks on a possible programme already in 2011. We had to find a solution together for a business model that was not viable and could not offer lasting prosperity to the people of Cyprus.

The challenges for Cyprus are immense, but Cyprus can count on the European Union to support it. As I have underlined yesterday in the talks that preceded the Eurogroup discussion, we should think not only about financial stability. It is about restarting the real economy. Last night, we agreed on a 10 Billion Euro package worth 55% of the GDP of Cyprus. And we need to look at how we can mobilise all the means at our disposal. That is why I have decided to set up a Task Force for Cyprus to provide technical assistance to the Cypriot authorities.

We want to alleviate the social consequences of the economic shock by mobilising funds from European Union instruments and by supporting the Cypriot authorities' efforts to restore financial, economic and social stability. We will bring in further expertise to facilitate the emergence of new sources of economic activity. The Commission stands by the Cypriot people.

The Task Force will be based in Brussels, with a support team in Nicosia. It will work closely with the Cypriot authorities to support and supplement the EU-IMF programme. Its work will have a strong focus on employment, competitiveness and growth. The Task Force will provide quarterly progress reports to the Cypriot authorities and the Commission. General coordination of the Task Force, which is also coordinating closely with the Task Force for Greece, will be ensured by Commission Vice President Olli Rehn.

As we have shown in the past, Europe faces its challenges together. We do not leave Member States facing a financial crisis alone. With responsibility on the part of Cyprus, we will ensure that solidarity is provided by the euro area.

I call on Cyprus to show unity and responsibility in the implementation of the agreements reached. And I call on all Member States of the European Union to show solidarity with the country that is facing extraordinary challenges and that needs this solidarity in very concrete terms.

Fc comment - Oh Manny, you little tinker, yer such a jester just when we needed one....lurve ya baby

Due to current economic conditions the light at the end of the tunnel has been turned off

saxitoxin wrote:LOL, one thing I like about the French is they are frank ...

"To all those who say that we are strangling an entire people ... Cyprus is a casino economy that was on the brink of bankruptcy," [French Finance Minister Pierre Moscovici] told Canal Plus television.

So this happened in Iceland, now it's happening in Cyprus ... Fruitcake, will the Canary Islands and Switzerland be next?

I think you should perhaps be including Luxembourg in that small select list. Financial institutions in Luxembourg have assets at around 22X the GDP. Cyprus was about 6X

Due to current economic conditions the light at the end of the tunnel has been turned off

The two main points being, a euro is a euro then and you can't hold it up or look at a serial number to tell a German euro from a Cyprus euro. And then people can't horde them or trade more valuable local paper notes.

I personally am against this but also believe it's inevitable.

I think part of the push for it and a single world currency will be in the form of tax being reduced because evasion will be impossible. In addition to stability of your credits not being attached to a local and volatile economy.

2dimes wrote:Do you think this will help a push toward electronic currency?

The two main points being, a euro is a euro then and you can't hold it up or look at a serial number to tell a German euro from a Cyprus euro. And then people can't horde them or trade more valuable local paper notes.

I personally am against this but also believe it's inevitable.

I think part of the push for it and a single world currency will be in the form of tax being reduced because evasion will be impossible. In addition to stability of your credits not being attached to a local and volatile economy.